Recent changes to the federal foreclosure-prevention program were billed as helping the unemployed, but in the long run, they actually make it harder for people without jobs to keep their homes.
When the new rules go into effect, unemployment benefits will no longer count as income for determining whether a person qualifies for a long-term reduction in their mortgage payments.
So for people with no income other than unemployment, there will be no loan modifications - the chief tool for preventing foreclosures.
"It's ridiculous how impractical the guidelines ... are," said Al Ripley, an attorney with the N.C. Justice Center. "They truly do not address the needs of unemployed people."
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This program is the centerpiece of the $75billion federal effort launched in February 2009 to stem foreclosures. President Barack Obama has said HAMP - the Home Affordable Modification Program - would help 3million to 4million people avoid foreclosure through 2012.
But only about 170,000 homeowners received long-term modifications in the first year. The small numbers drive criticism that the U.S. Treasury program is flawed, and that lenders do a poor job of implementing it.
To be sure, the HAMP changes will provide short-term help for unemployed homeowners. Lenders and mortgage servicers will be required to give at least three months of lower mortgage payments for people receiving unemployment benefits. The temporary reduction could last as long as six months.
Afterward, homeowners will be considered for a long-term modification with reduced payments. But, at that point, unemployment benefits will no longer count as income for determining whether they can qualify for a modification. The changes are expected to take effect over the next several months.
"Any programs that give people breathing space while they're out looking for work ... are a positive thing," said Mark Pearce, the top N.C. mortgage regulator and a leader in national foreclosure-prevention efforts. However, he said, "This program doesn't address the folks that are unemployed for a longer period of time."
The changes come as unemployment rates remain stubbornly high, posing big challenges for efforts to slow foreclosures. More than 6.3million people nationwide have been unemployed longer than six months - five times pre-recession levels.
The changes are "not enough to get significant numbers of people to the permanent solution we're all looking for," said Rich Lee, foreclosure prevention team leader for the N.C. Housing Finance Agency. "Think of it as a Band-Aid until you can do more to stop the bleeding."
Initially, the government's goal was to deal with fallout from the exotic mortgages that helped fuel the nation's financial crisis. The idea was to prevent foreclosures by reducing high interest rates, or otherwise moving homeowners into more stable mortgages.
But in 2009, unemployment quickly became the bigger concern. The importance of unemployment, as a cause of foreclosures, has more than doubled during the downturn, said Roberto Quercia, director of the Center for Community Capital at UNC Chapel Hill. Every 1 percentage point increase in unemployment yields a 0.4percent increase in foreclosures, he said.
The Charlotte area's unemployment rate held steady at a record 12.8 percent last month. That's more than 8 percentage points above the 2007 level.
Treasury's March 26 announcement described the HAMP changes, in part, as "designed to help unemployed." But a Treasury official acknowledges that a "goodly number" of people in the new program for unemployed won't qualify for long-term modifications.
"The goal is to give these people time to find stable income," said Mark McArdle, a Treasury policy analyst.
Treasury eliminated unemployment benefits as eligible income for modifications because the payments are only intended to tide people over until they land another job. Basing long-term modifications on short-term income could just delay inevitable foreclosures.
Awarding modifications based on low unemployment income also could mean homeowners who eventually land jobs would be paying too little.
"Our goal with HAMP is to help people stay in their homes with a sustainable modification," McArdle said. "The goal of this program is to get more people temporary help."
Currently, homeowners applying for a modification based on unemployment income are supposed to provide evidence they have at least nine months of benefits remaining. That's hard to do, especially when the modification process drags on for many months.
Extensions have put benefits well beyond the standard six months, but there's no way to say whether Congress will continue that. Lawmakers took their two-week spring recess without passing an extension, jeopardizing benefits for thousands of laid-off workers.
There is widespread agreement that the new payment-reduction period is too short for people to get a job in the current downturn.
Last week, a top Bank of America mortgage servicing executive said the three-month reduction is good, but not enough. "Six months may not even be enough," said Rebecca Mairone, the Charlotte bank's national default servicing executive. The bank is the nation's largest mortgage servicer.
One concern of longer payment reductions is that accounting guidelines might require lenders to write down the value of a loan if a reduction lasts more than three months. Massive write-downs of troubled mortgages have already caused problems for banks and the broader economy.
Many lenders already offer temporary payment reduction, called a forbearance. The HAMP changes provide a standard approach. The amount of payments deferred also is spread over the life of the loan. In some existing forbearance programs, borrowers must make up for the reduced payments at the end of a few months.
People in the modification process prior to the effective date of changes won't be subject to the new rules, McArdle said. After the changes, the forbearance plan will be the only choice for people receiving unemployment benefits.
Borrowers will have to submit proof they're receiving benefits and meet other basic HAMP requirements, such as having a loan of less than $729,750. As with HAMP, aid is available only on primary residences. Payments, including insurance and taxes, will be lowered to no more than 31 percent of gross income.
The changes could create another bottleneck in a process that is already slow, cumbersome and fraught with missteps. The new problems could start when people complete their payment reduction period and are being considered for a long-term HAMP modification.
People who have found jobs or have other income, should apply for a modification 30 days before their forbearance is scheduled to end. However, many people spend months, even a year, trying to get a modification. Details under the new process are still being worked out.
"The servicing industry has struggled to implement the HAMP program efficiently and effectively," said Pearce, an N.C. deputy banking commissioner. "Each new wrinkle, doesn't make it easier."